Page - 297 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

12 IntegratedDisasterRiskManagementandAdaptation 297 Box12.1Decision metrics NetPresentValue(NPV):Costsandbenefitsarisingover timearediscountedand the difference taken,which is the net discounted benefit in a given year. The sumof the net discountedbenefits is theNPV.Afixeddiscount rate is used for expressing future values in today’s terms to represent the opportunity costs of using the public funds for the given project. If theNPV is positive (benefits exceed costs), then a project is considereddesirable. Benefit-to-Cost Ratio (BCR): a variant of theNPV.The total discountedbenefits are dividedbythe totaldiscountedcosts.Bydefinition,abenefit-cost ratioof1means that the expected discounted benefits of implementing themitigation equal its costs.Any measurewhere aBCR is greater than 1 is considered to be cost-effective and should be implemented as the benefits exceed costs and a project thus adds value to society. Anymeasurewith aBCR less than 1 (implying that the upfront cost ofmitigation is higher than the expected discounted benefit) should not be implemented. Due to its intuitiveness theBCRisoftenused. Internal Rate of Return (IRR):Whereas the former twocriteriauseafixeddiscount rate, this criterion calculates the internal interest rate for which theNPV 0, which is considered the return of the given project. A project is rated desirable if this IRR surpassesanaverage returnonpublic capital determinedbeforehand. SourceMechler et al. (2014b) An important benefit category in a CBAof disaster risk reductionmeasures is theexpectedvalueofavoideddamagecreated(definedas thepreventedrisk).Disas- ters are low-probability high-impact risks.They followextremeevent distributions whicharetypicallyverydifferentfromnormaldistributions.Probabilisticanalysis is required toassess theexpectedfloodriskaswellas thebenefitsof riskmanagement options in terms of reduced damages. As an illustration for the case of flood risk management inHoChiMinhCity,Scussolini et al. (2017)used the riskassessment frameworkofSect.12.2toestimatetheNPVandBCRofdifferentfloodriskadapta- tionstrategies, including theconstructionofa ringdike, anddry-proofingbuildings andelevatingareasathighrisk.Costsandbenefitsarecalculateduntil theyear2100. Toensure that theBCRranks theadaptationmeasures in thesameorderas theNPV, theBCRwasnormalised toaccount for thewidelydifferent investment costsof the measures. The results are shown in Fig. 12.6. The flood risk adaptationmeasures appear toyieldbenefits thatsubstantiallyoutweighthecosts,exceptfor theringdike in the high climate change scenario. The ring dike has the lowest BCR andNPV, while the combination of elevation and dry-proofing of buildings has the highest BCR andNPV and is, thereby, the optimal adaptation strategy, from a long-term economic perspective. In evaluating riskmanagement options, the results of CBA canbecombinedwithother(non-economic)considerationsandindicators.Economic efficiencyisusuallyconsideredanimportantaspectofdisasterriskmanagementand adaptation,butoftennot theonlyaspect thatneeds tobeconsidered.